Today’s intelligent economic scholars acknowledge and understand that small businesses are the biggest contributors to economic and employment growth in just about any economy. While the ratio of small to big business might vary from country to country, but there is no denying the fact that the contribution of small businesses to the economy cannot be ignored or overlooked. Regardless of the economy or the country, small businesses have become crucial to economic development.
However, while governments across the globe try to encourage small businesses to operate and flourish, they set some limitations for them too, which makes it hard for small businesses to become successful. One of these limitations is that of tax. In fact it has been noted that in some cases, taxes are the cause of a small business failure too. This is particularly because small businesses are usually not in a position to be able to afford to pay taxes or go through the procedure of hiring a tax advisor or consultant.
Taxation is an expensive and tiring process for any business and while large businesses are able to endure it, small businesses often may not. However, when tax is concerned small businesses are not treated differently from large-scale organizations and businesses, which is a little harsh. It is this treatment that exposes small businesses to a plethora of problems and could possibly result in failure.
A concept called the “threshold tax” should be implemented in small businesses in order to encourage growth of small businesses. Threshold tax is a simple concept that means that the more money someone generates, the more they are taxed. This benefits small businesses since it makes the taxing process fair for them. It makes sure that small businesses are not taxed until they start generating good amount of money, after which taxing is completely justified.
Tax should also depend on profit and not on cash flow. Cash flow and profits are two different things and taxers must acknowledge that. This is because cash flow could be borrowed from a financial institution and may not necessarily be owned by the business. Moreover, in the case of small businesses, there are situations where profit is tied up as working capital. And in such cases, taxing the business solely on the profit when the firm hardly has any cash flow is unfair. This is precisely why taxers must analyze the true profitability and cash flows of the small business before determining whether they should be taxed or not.
Here are several suggestions that can make taxes easy for small business.
- Simplifying tax legislation
- Small businesses must be taxed only on cash generated by operations
- Working capital should be excluded from the amount that is taxed
- Give small business a tax holiday of about two years after start-up
- Exemptions should be given to small business
- Taxable income thresholds should be set
To many of these suggestions may sound exhaustive, but they are not. Substantial research is needed and governments across the globe must realize that in order to elevate the overall economy, small businesses must be encouraged.